The world is a complex web of connected relationships where local events
can have global impacts almost instantaneously
(e.g, 9/11, European debt crisis, BP oil spill, the rapid growth of China
and India). Scenario planning is a tool to aid management in this
environment of uncertain and voltile markets. It provides a way to
understand the forces that will shape the future such as, globalization,
technological change, demographics, and environmental sustainability. The
purpose of this paper is to describe scenario planning, discuss how
accountants can get involved, and provide a case study to illustrate how the
technique works in practice.

Building Scenario Plans

Scenario planning focuses on three questions: What could happen? What
would the impact be on the organization's strategices, plans and budgets?
How should the organization respond? There are four broad types of scenarios
that include: social, economic, political, and technological. The first step
is to define the issues or decisions the scenario project is trying to
evaluate, and to determine if there is a high degree of uncertainty
involved. If the answer is yes, then scenario planing may be an effective
tool. The basic approach to scenario planning is illustrated in the graphic
below along with a short description of each step.

Scenario Planning Basic Approach

Defining objective and scope - This step includes identifying the issues,
decisions, key variables involved, scope of the study, time horizon and
approach selected and agree on by senior management. The project team should
develop a project charter that includes all this information.

Define key drivers - This step includes identifying the key internal and
external drivers involved in the study and the critical relationships
between them.

Collect and analyze data - This includes collecting quantitative and
qualitative data as well as expert opinion, and the analysis of the data to
determine the impact and predictability of the drivers identified in step
two. It also includes defining appropriate measures for the key drivers.

Apply scenarios - Test the sensitivity of strategies and plans for each
scenario, formulate contingency plans and mitigation stratgies, and
communicate the results to all constituencies.

Maintain and update - Integrate the leading indicators and key
performance measures, update the data and scenarios as needed over time.

Role of Accounting and Finance Professionals in Scenario Planning

Accounting and finance professionals can get involved in scenario
planning by analyzing the financial implications of each scenario and the
alternative strategies and contingency plans. They can also test the
sensitivity of assumptions, develop alternative financial plans under the
various scenarios, help define key performance measurements, and monitor and
report on internal and external indicators that might influence the
strategies.

Scenario Planning Case Study

The case study involves an electric company that wants to develop a
better understanding of how environmental issues will affect the company, as
well as the emerging markets for a smart grid, the risk profile of each
market and the ease of market access. These issues become the objective of
the study. The key drivers involved are determined to be public
opinion, and political action. These first level drivers include second level
drivers as illustrated in the graphic below.

The data collected includes information about economic growth, estimates
of construction activity, fuel prices, GDP, climate change, demographics,
technical feasibility, government regulations, taxes, and subsidies, and
competitors' actions. Using this information the project team developed four
scenarios as illustrated in the graphic below. The key drivers, i.e., public
policy and public opinion are placed on the vertical and horizontal axes.
Actions related to public policy range from mandate to subsidized, while
public opinion ranges from early adopter to mass market adoption. The four
scenarios include necessity (where non-green solutions are shunned by the
market), market driven (green is a source of competitive advantage), mandate
(green is a required cost of dong business), and steady as she goes (high
prices for early adopters before market flattens).

Various strategies are developed for each scenario in terms of the
organization's approach to innovation, marketing strategy, market goals, and
financial goals. These possible strategies are provided in the illustration
below labeled Scenario Implications.

Using the implications for the four scenarios, the project team recast the
company's budget and five year plan under each scenario showing financial
implications and performance measurements that were tracked to the company's
balanced scorecard. This was followed by what-if analysis and a constant
review comparing actual and forecasted results against the scenarios.